Greek taxes strangle funds industry in name of austerity

Greece’s latest austerity measures are choking off one of its few sources of local private investment, the funds management industry, thanks to massive tax hikes buried in 7,500 pages of financial reforms approved by the parliament last month.

One listed Greek fund has frozen a 300 million euro ($340 million) investment plan, and another has put a share issue of at least 250 million euros under review, since the hikes were passed – a footnote in a reform package that appeased the government’s European creditors and avoided another cash crunch.

The country’s 7 billion euro ($8 billion) funds industry, though small, is a potentially important vehicle for much-needed investment in the shattered economy, helping firms to raise money and buying up property from banks burdened with bad loans.

The new tax rates, applied to funds under management, underline how Athens is relying on a narrow, overstressed tax base to stay afloat, depressing economic activity, while the country’s large black economy remains out of reach.

The Finance Ministry, which is also overseeing a hike in value-added tax as well as separate taxes on Internet usage and fuel, did not respond to requests for comment.

Taxes on mutual fund assets will jump by as much as seven-fold, with new tax rates differing by type of fund.

Real estate funds, a fast-growing source of investment in recent years, fare the worst because Athens has also doubled a separate tax on landlords, in turn hurting property values.

Such a tax, which comes on top of normal corporate tax, is unusual for the asset management industry.

No major European fund management center imposes such a levy, with taxes usually imposed on dividends, interest income or capital gains rather than a blanket rate on funds under management.

“We were planning investments of more than 300 million euros, which would have beneficial multiplier effects, but now the plan has been frozen,” said George Chrysikos, chief executive of listed real estate investment fund Grivalia Properties.

“The taxation is hard to bear and will likely force property funds to drastic moves, including freezing plans to raise capital, returning capital to their shareholders and even switching residence and delisting from the Athens stock exchange.”

Another property investment fund, NBG Pangaea, is likely to ditch plans to raise between 250 million and 400 million euros in a share issue, said a senior executive at the fund who spoke on condition of anonymity.

It planned to invest the proceeds in commercial property.

Greek mutual-fund investors are mainly middle-class investors, each with around 20,000 to 30,000 euros invested, while the wealthy use private banking, industry insiders say.

“I would be looking to switch to a foreign mutual fund management company to avoid it (the tax hikes), but even if you pull the money out you can’t send it abroad under capital controls,” said Nikos Villiotis, 47, a civil engineer who has about 60,000 euros invested in Greek equity and bond funds.

Greece’s capital controls, imposed a year ago to prevent the collapse of its financial system, have dissuaded investors from stampeding out of local mutual funds, but fund managers say redemptions are still likely once the controls are lifted.

“Today, due to capital controls, they cannot do it. But this is short-sighted because at some point capital controls will be lifted,” said Theodore Krintas, vice-president of Greece’s institutional investors association.

Greece’s mutual funds industry has shrunk dramatically since the financial crisis erupted in 2010 when investors took advantage of their then freedom to move money abroad, but the industry has remained a precious source of investment.

Property funds alone had planned to invest 1.5 billion euros over the next three years, including buying real estate from the nation’s cash-strapped government.

“We shouldn’t be shooting at the home fund management industry, money needs to stay at home to fund investments and help the economy recover,” said George Koufopoulos, head of 3K Investment Partners.

Given that investors are effectively locked into their funds due to capital controls, the shares of the largest listed property fund managers have actually outperformed the wider market.

Since late May shares in Grivalia Properties, part-owned by Canada’s Fairfax Financial Holdings, have fallen about 6 percent while Pangaea has lost 5 percent, though both stocks are very thinly traded. The Athens bourse’s broader market index has fallen 10 percent.

Greece’s securities regulator agreed that the new tax burden weighed heavily on funds but said it could be eased later on.

“We also think the tax impact is heavy on growth vehicles such as mutual funds and property investment trusts but official lenders insisted,” Charalambos Gotsis, chairman of the Capital Markets Commission, told Reuters.

“We had expressed our disagreement, suggesting that the tax should be on returns and not on the capital the funds manage.”